From north to south: South American refining

Latin America is a major and growing oil market, with abundant resources and a growing domestic market. It also plays a key role in the greater Western Hemisphere market, which includes all the countries in North, South and Central America, and the Caribbean. A number of countries are major exporters of crude oil and synthetic crudes, and the upstream sector has been buoyed by years of strong international crude prices. In most of the countries, the government has a major, if not the sole, role in running the oil industry. Refineries have been viewed as an essential part of the energy business, and refineries are often run more or less as an arm of government. Most of the countries operate refineries, even when they are sized for small markets and scarcely competitive at the international level. Some of the larger refineries have been built and upgraded as export centres. Other facilities have been built primarily for domestic markets, but they have been deliberately oversized, expecting to export surplus product until demand caught up with output.

For the most part, exports have found ready homes in other Western Hemisphere markets, and there is a strong level of Western Hemisphere integration of oil markets. This has advantages and disadvantages. Access to export markets is key, as are conditions in export markets. Recent events are now changing the Western Hemisphere market, however, and Latin American refineries are working in a new business environment. In this article, the Latin American refining sector will be discussed in light of the changes in oil supply and demand within the Americas.

Latin American oil demand

Latin American oil demand from 1965 – 2012 showed two key features. First, the robustness of growth over the period. Latin American oil demand grew at an average rate of 3%/y for 47 years. In 1965, the market was 1.6 million bpd in size, but demand quickly reached 3 million bpd by 1977, 4 million bpd by 1994, 5 million bpd by 2004, and it reached 6.5 million bpd in 2012. The second feature is that the pattern of demand is shifting more to middle distillates and light distillates, whereas demand for fuel oil is now declining. This is a higher value demand barrel, and the region’s refineries will be increasingly challenged to produce a growing share of low sulfur diesel and gasoline, particularly utilising heavy and ultra heavy sour crudes. Adding to this challenge is the fact that many countries control petroleum product prices, so that refinery revenues may be out of line with international norms. This has cut into refinery profitability.

Latin American refining

Development of capacity

Latin American crude refining capacity expanded quickly in the 1960s before being forced into downsizing during the early 1980s, a time of global overcapacity. Latin American CDU capacity more than doubled from approximately 3.56 million bpd in 1965 to over 7.2 million bpd in 1978. By 1986, capacity had dropped to 5.8 million bpd. By the late 1980s, oil prices collapsed. Refining capacity began to creep back up, reaching approximately 6.0 million bpd in 1990, stagnating once again, and then reaching a peak of approximately 6.6 - 6.7 million bpd in 2009 and 2010. However, the North American market has been slumping while production is still rising. Export oriented refineries in Latin America could no longer compete, and two important Caribbean refineries closed: the 500 000 bpd Hovensa refinery in the Virgin Islands and the 235 000 bpd Valero refinery in Aruba. Latin American CDU capacity fell to 5.9 million bpd in 2012.

Conclusion

Abundant crude resources, growing domestic oil markets, and determined governments and companies should be a magical combination powering forward the many refinery projects in Latin America. Yet most of the ambitious plans have faced significant delays and cost overruns, and there are challenges ahead. The Western Hemisphere oil market in which Latin American refiners operate is changing, and this is changing the original assumptions that went into refinery construction plans. Export oriented refineries in particular have had to compete in more distant markets, chiefly Asia, when they have not had access to other Latin American markets or the North American markets. The US market is now awash in product, and many Latin American marketers are importing larger volumes of finished product, including gasoline and diesel, from the US. This has been far more advantageous than attempting to export product to the US. In 2005, the US imported 1.062 million bpd of product from Latin America and exported 221 000 bpd to Latin American markets. This balance has now swung entirely in the opposite direction, with the US importing only 188 000 bpd of refined product in 2013 (January - September average) from Latin America, while Latin America is importing a whopping 1.146 million bpd of product from the US. Some current fuel imports are being used in the electric power sector to meet a short term crunch in electricity supply. Other imports are flowing to replace losses in output from planned and unplanned refinery maintenance. Still other imports are occurring because planned refinery construction in Latin America has not been completed as originally scheduled.

Latin America is home to many small, simply configured refineries that produce poor quality fuels. Many are overdue for modernisation. But the external market has grown competitive, and for many of these upgrades to take place, their focus would have to be internal. Many countries in Latin America subsidise fuel prices, however, that stymies investment in domestic refining. Looking north, it is worth noting that for decades in the US, there have been no greenfield refineries built, and the refinery investments made were limited mainly to those required to comply with environmental and safety regulations. It is possible that the Latin American refining industry is also entering a similar phase, with the focus shifting to domestic markets and regulatory compliance. Making investments in product quality and environmental protection is a positive step toward a healthy population, and adequate fuel supply is a vital piece of overall economic activity and growth. Also, being able to produce high quality fuels assures that Latin American refiners will be able to access a full range of export markets in the future, if additional demand materialises. In the near term, Latin American refiners planning export led ventures are looking toward Asia not only for market outlets, but also for investment capital. There are many advantages to Western Hemisphere oil market integration, but there are also disadvantages for projects that relied upon North American markets to absorb excess output. For the time being, the product is flowing from north to south.

Written by Nancy Yamaguchi, contributing editor, and adapted for the web by Claira Lloyd.

The full article can be found in the March issue of Hydrocarbon Engineering.